NPR reported this week on a troubling trend. Bank of America in Idaho and in other states is suing people who lost their homes to foreclosure to attempt to recover the difference between the mortgage and the current value of the home in today’s market. This is called a deficiency judgement. In the case of Ben Jensen and his wife, Bank of America sued them for $140,000. Unfortunately for the Jensens, Idaho is one of about 40 states that allow banks to pursue deficiency judgements. Even though the Jensens had lost their home and damaged their credit rating, the bank thought it was worth the effort to squeeze them for more money. They had at best $5,000 in savings, so there was no way the bank would get the amount they sought, and instead would merely have pushed the couple into bankruptcy. They managed to settle by will have to pay the bank $75 a month for three years.

According to NPR, “The National Consumer Law Center, a nonprofit consumer advocacy group, confirms deficiency judgments appear to be going up across the country. How that plays out depends on state law. Geoff Walsh is a staff attorney with the organization. He says approximately 40 states, including Idaho, allow lenders to sue former homeowners for the amount of the mortgage that remains after a foreclosure.”

Anti Deficiency Laws

As a form of relief from some aspects of foreclosure, some states have “anti-deficiency” laws, which protect purchasers of residential real property used as primary residence.Anti-deficiency laws typically provide no protection for second mortgages or home equity lines. Also, there is no protection when the property is not used as the primary residence of the purchaser.

In a typical foreclosure, if the purchaser fails to make the mortgage payment the property is foreclosed and title is obtained by the lender through a legal procedure. The property is then typically sold to pay the mortgage, and a deficiency between the sale price and the outstanding balance of the mortgage usually exists. Under anti-deficiency laws, if the mortgage is for the purchase of a dwelling occupied by the purchaser, the purchaser will not be held responsible for any deficiency. The lender can only recover the property and the proceeds of a subsequent sale. The purchaser does not pay any deficit between the sale proceeds and the outstanding loan balance. This allows the purchaser to walk away from a property without owing a deficiency judgment amount.

States that have statutes in place to prevent banks from going after a deficiency include:

Alaska
Arizona
California
Connecticut
Florida
Idaho
Minnesota
North Carolina
North Dakota
Texas
Utah
Washington

In some states, banks are only allowed to file a single lawsuit to collect a mortgage debt. How this plays out varies by state. In New York, for example, a lender must choose between the actions of foreclosing on the property or suing to collect the debt. The following states have some type of one action statute:

California
Idaho
Montana
Nevada
New York
Utah

How to Avoid a Deficiency

It pays to contact your bank as soon as you can’t make a mortgage payment. Try to get a loan modification, or a reduction in the principle. As long as you continue to make payments, you may qualify for the new federal program propose d by the Obama administration to make it easier to refinance a mortgage, provided you have stayed current on payments for more than six months. Talking to the bank can be painful, and the bank will continue to call you for status updates, but it’s better to try to do a short sale (selling your home for less than you paid for it) with the bank’s approval, than simply walking away and letting the foreclosure go through. You may be able to work out a deed in lieu of foreclosure. This type of mortgage default requires the cooperation of both the lender and the borrower. It is fast and inexpensive because both parties agree to transfer the property to lender, avoiding the time and expense of foreclosure. Another way to avoid a deficiency is to declare bankruptcy. Even the threat of declaring bankruptcy can get the bank to cave in and reach some sort of settlement, as in the case of the Jensens. The earlier you settle, the lower the settlement is likely to be.

In the end, losing one’s home is perhaps one of the most stressful things that can happen in life. On top of this stress, the last thing anyone needs is to have the threat of the bank that gave you the mortgage come after you, even years later.